Dear ArgenGrowther,

Politics saving a government that detests it? That seems to have been the case this week, where the change in the Chief of Staff and the handling of the Bases Law and the Fiscal Package marked an agenda characterized by volatility in the dollar, stocks, and bonds. Meanwhile, the President is on a trillion-dollar tour.

Financial ArgenGuide:

Data:

• Country Risk: 1,312; -9.08%

•  AL30: 56.59; 3.95%

• BCRA: Bought foreign currency for USD 115 million; Reserves USD -450 million, today at USD 28.663 million.

• Consumer Confidence Index (UTDT) May: +3.1%.

• General Activity Index (IGA) of OJF April: +1.1% monthly; -3.1% year-on-year.

• Auctions: maturities of $0.3 trillion were due; $3.5 trillion were taken in:

  • Lecap (S14J4): 4.20% MER (minimum rate was auctioned); $1.5 trillion.

  • Lecap (S12L4): 3.57% MER; $1 trillion.

  • Lecap (S16G4): 3.59% MER; $1 trillion.

Now, what does all this mean?

Positive or negative? Spoiler answer: neither here nor there. The drop in country risk helps, but volatility continues despite the majority in the Senate to address the Bases Law and the Fiscal Package. Another monstrous auction continues to migrate pesos from the BCRA to the Treasury.

Dollar and Strong Peso. We continue with volatility. The dollar was down all week, but again, after the auction, the dynamics changed, ending the week slightly positive.

On the other hand, we see that the dynamics of BCRA purchases are no longer what they were. In the last rounds, the purchase volume decreased, and we even had days of sales. Although May resulted in purchases of USD 2.5 billion, they were 26% lower than in April.

After another auction with excess pesos, we saw movement in the dollar. Will these pesos without destination be fuel for the fire? The feeling is that the fire has no oxygen; the recession and lack of pesos (monetary base contraction) naturally extinguish the fire and put a ceiling on the dollar's rise.

Lower rates = Higher pressure on the exchange rate.

Recession = Lower pressure on the exchange rate.

Monetary base contraction = Lower pressure on the exchange rate.

At the end of May, we saw the first month where the MEP dollar outperformed inflation and interest rates. May came to adjust much of those feelings for those who had been feeling symptoms of exchange rate lag.

Recomposition of Public Accounts. We continue on the long road of recomposing the country's public accounts. The government has already framed the tariff part, continues to reduce remunerated liabilities, and inflation continues to decline, all while waiting for positive real economic activity numbers.

Rates. Finally, the government seeks to end energy subsidies gradually. It determined a transition period towards Focused Energy Subsidies, extending from June 1st to November 30th, 2024, to pass on the real costs to users.

Eliminating energy subsidies = Lower public spending.

Auctions. Another week with a mega auction, with a peso allocation of $3.5 trillion having received offers for $16.7 trillion, remembering that only $0.3 trillion was due. Again, they left a mountain of pesos, $13.2 trillion outside the auction! Another auction with positive net financing and closing May with a record.

In this case, the government decided to go with a Minimum Effective Rate of 4.2% only on the shortest Lecap, reducing the "reward" to be paid (there was strong demand for the Lecap with "reward," and many pesos were left out). As a positive point, we see the de-indexation of liabilities, as 100% of the auction was at a fixed rate (the last one with 100% at a fixed rate was in December 2022), and the government is achieving one of its goals, which is to rebuild the peso curve. The average awarded term of the auction of 40 days is the shortest of the latest auctions. This makes a lot of sense given that most of the pesos come from overnight repos (1 day), so we see it as positive that the debt has a longer duration (although it remains short and easily exitable).

Among the relevant points that occurred after the auction was the Treasury's repurchase of all AL29 bonds held by the BCRA, repurchasing VNO USD 801.3 million, equivalent to $552.6 billion.

At the same time, as part of the government's ongoing strategy, some of the pesos were deposited in the BCRA account as liquidity reserves that increased to $13.6 trillion.

BCRA. On the path to destroying remunerated liabilities but accumulating fewer reserves than expected?

Remunerated Liabilities. Pesos continue to migrate from BCRA to Treasury in each new auction, and remunerated liabilities are being reduced, already at 10-year lows in constant pesos and on the path to disappearance. To put it in perspective, in November last year, they represented 8% of the broad base, and today, they are at 2%, and this number will likely continue to fall biweekly.

Lower remunerated liabilities = Lower monetary issuance.

Lower monetary issuance = Lower inflation.

The constant migration of pesos from BCRA to the Treasury aims to clean up the BCRA balance sheet and, as a clear counterpart, greater debt under the Treasury's responsibility. Is the government seeking to strengthen the BCRA to pave the way for lifting the capital controls?

Economic Activity. After closing a really alarming March, we see some light in the April numbers. The General Activity Index (IGA) of OJF recorded +1.1% monthly in April against -1.9% in March.

Economic Recovery. SME exports rebounded month by month, and in March, they achieved their first positive year-on-year quarter, gaining 2% compared to the previous year's quarter. Although 9 of the 16 analyzed sectors showed declines, the oil and fuels sector had the highest growth with +80%.

The energy surplus enormously helps the recovery, and we see the highest sector surplus since 2009.

We continue with the question, does recovery come with credit, as the President said? Week by week, we show different data indicating that credit is at rock bottom. Undoubtedly, there is much room for growth in everything related to credit.

Macroeconomic stability is a fundamental and necessary factor to get out of the pit; much of the rate drop is already in place, and now we need stability.

Lower Rate = Greater incentive to take credit.

Greater incentive to take credit = More credit?

More credit = More economic activity.

The street. Not only is it holding up, but the consumer confidence index rose 3.1% in May, and the President's positive image, according to several pollsters, increased in the last month. It also helps that allocations to the most disadvantaged sectors are at real highs in the previous four years.

At the same time, positive economic expectations have surpassed negative ones after years of being in negative territory. All this seems to coincide with the bottom of the recession. Meanwhile, real wages continue to recover, and we hope this path continues in the coming months.

Capital Markets - Actionables

First, let's go with the easiest actionable and remember that the pesos, which for years we have been investing in t+0 without thinking, will be managed with a much higher percentage of t+1: the rate differential between t+0 and t+1 will increase, or t+0 funds that are not pure money market will start to appear, so moving funds from t+0 to t+1 is the logical path in most cases.

This week left us with a sharp drop in country risk that did not translate into a rise in the same way for bonds, which, although they rebounded, the bounce seemed somewhat lukewarm, especially considering the political victory the government had in the week. This political victory was strongly reflected on Thursday, with an S&P Merval rising 5% in dollars; Argentine stocks have been dancing to the country's volatility rhythm but have had an upward trend since Milei's victory in the runoff.

After a new auction, the peso curve adds more points, and every fortnight it becomes healthier? For those in pesos, managing them consciously will be increasingly important.

We affirm that as long as the government continues to show good numbers, the country's risk reduction will eventually resume its course, and hard-dollar bond rates will continue to compress.

Rate compression = Price increase.

Do you want to receive a summary of what happened in the capital markets during the week? Subscribe to: Desde la Pantalla.

Brief Reflection

One of the busiest weeks in the realm of non-data. On the one hand, we had the President touring the United States and meeting with some of the world's leading CEOs and entrepreneurs: Apple, Google, Facebook/Meta, and Open AI; it seems like science fiction, but the President of the Argentine Republic is today one of the world's leading figures, unthinkable is an understatement.

While the President was in the United States, Argentine politics moved to the rhythm of the new Chief of Staff, Guillermo Francos, who, in the blink of an eye on a Wednesday of comings and goings, obtained the majority for the Bases Law ruling in the Senate. Subsequently, this expanded to a favorable ruling for the Fiscal Package, which was necessary for this government's objective. This is the government's first victory in a long time, pending confirmation when both laws are addressed.

The change in the Chief of Staff seems to have been well-received in terms of expectations. It brings pragmatism and politics to the government's core, so it is necessary to govern the country and move forward with the economic plan proposed by the Executive. In the words of the new Minister, his rise has a direct relationship with being the interlocutor between the government and traditional politics.

I believe that the government has begun to play politics positively for the country and the government's proposed economic direction, although this goes against a reorganization of traditional politics. Argentina needs short-term results; the socio-economic crisis demands it, and the time will come to tackle other important but not urgent issues.

The progress of the Fiscal Package is a very positive aspect of the fiscal anchor sought by the government regarding expectations. If we add to this what could be triggered by the Bases Law and the new economic deregulations that the Executive would propose following the approval of the laws, in a few months, we could be in a completely different country that ranks among the top in economic freedom (yes, we got a bit optimistic). All this will have to come together with exchange rate and macroeconomic stability to even think about being a moderately normal country.

We insist on the experiment that Argentina is for the world (for a reason: our President is one of the world's leading figures), which could be an inflection point for Argentina to emerge as the new beacon of the Western world. Last week, we also said that the board is set, and we have the world's leading political figure (whether we like it or not), who is increasingly indisputable, and at the same time, players who play to subtract points. Today, it seems that those players who don't add are more cornered. Still, the world will continue to watch us from afar as the experiment we are, so investments and the recovery of the growth path will be delayed if we don't take advantage of the moment and all pull in the same direction.

Last week, I wondered if the three powers would be up to the circumstances, and it seems that this week, the Legislative responded. Will it be confirmed in the coming weeks? Are we moving towards a country where politicians represent the population and act according to what Argentina needs? Will the judges be up to the circumstances and adapt to a liberal Argentina? The three powers acting in the same direction will be a fundamental pillar to show the world that Argentina has changed.

Argentina needs a highway to do business, not a pothole-filled street; are we getting closer? Today, due to a political success, I dare say yes.

See you next week, Vamos Argentina!

Nau Bernués
Founder, ArgenGrowth

PS: Follow me on Twitter and LinkedIn.

PS2: As a newborn community, we want to hear your thoughts!

PS3: Enjoyed this edition? Share it on Twitter and LinkedIn!